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Product Development Institute Inc.

For information call +1-905-304-8797

Portfolio Management for New Products

By: Dr. Robert G. CooperDr. Scott J. Edgett

Product Innovation Best Practices Series

Picking The Winners

www.stage-gate.com

Reference Paper # 11

Product Development Institute Inc. 2001-2008


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Portfolio Management for New Products:

New product portfolio management is about how you invest your businesss product development

resources project prioritization and resource allocation across development projects. This paperaddresses the four goals of portfolio management and the importance of having an established, highquality Stage-Gate system in place.

These pages contain copyright information of Product Development Institute and member companyStage-Gate Inc., including logos, tag lines, trademarks and the content of this article. Reproducing inwhole or any part of this document is strictly forbidden without written permission from ProductDevelopment Inc. or Stage-Gate Inc.

Picking The Winners


Keywords:Stage-Gate, new product process, portfolio management, project prioritization, and resourceallocation.

By: Dr. Robert G. Cooper,Dr. Scott J. Edgett


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.

Picking The Winners

Executive Summary

New product portfolio management is abouthow you invest your businesss product de-velopment resources project prioritization

and allocating resources across developmentprojects.

There are four goals in portfolio manage-ment maximizing the value of the portfolio,seeking the right balance of projects, ensur-ing that your portfolio is strategically aligned,and making sure you dont have too manyprojects for your limited resources. And thereare many tools some quantitative, othersgraphical, some strategic designed to helpyou chose the right portfolio of projects.

Maximizing Your Profits From R&DInvestmentsHow should you most effectively invest your

product development resources? And how shouldyou prioritize your development projects and al-locate resources among them? These are crucialissues in new product portfolio management.Much like a stock market portfolio manager,those senior executives who manage to optimizetheir R&D investments to select winning new

product projects and achieve the ideal balanceand numbers of projects will win in the longrun1.

Most important, your new product processor Stage-Gate system must be working inorder to achieve effective portfolio manage-ment: it must deliver data integrity and alsoweed out the bad projects early.

Most important, your new product processor Stage-Gate system must be working inorder to achieve effective portfolio manage-ment: it must deliver data integrity and alsoweed out the bad projects early.

study2. And top performing businesses tend torate the importance of portfolio managementmuch higher than do poorer performers. Hereswhy:

First, a successful new product effort isfundamental to business success. This

logically translates into portfoliomanagement: the ability to select todaysprojects that will become tomorrows newproduct winners.

Second, new product development is themanifestation of your businesss strategy.One of the most important ways youoperationalize strategy is through the newproducts you develop. If your new productinitiatives are wrong the wrong projects, orthe wrong balance then you fail atimplementing your business strategy.

Third, portfolio management is about

resource allocation. In a business worldpreoccupied with value to the shareholderand doing more with less, technology andmarketing resources are simply too scarce towaste on the wrong projects. Theconsequences of poor portfolio managementare evident: you squander scarce resources,and as a result, starve the truly deservingprojects.

Four Goals in Portfolio ManagementThere are four goals in new product portfolio

management:

Goal #1. Maximize the Value of YourPortfolio: Here the goal is to select new productprojects so as to maximize sum of the values orcommercial worthsof all active projects in yourpipeline in terms of some business objective.Tools used to assess project valueinclude

3:


Portfolio Management for New Products

By: Dr. Robert G. CooperDr. Scott J. Edgett


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NPV: Determine the projects net present

value and then rank projects by NPV dividedby the key or constraining resource (for ex-ample, the R&D costs still left to be spent onthe project; that is, by NPV/R&D). Projectsare rank-ordered according to this index untilout of resources, thus maximizing the valueof the portfolio (the sum of the NPVs acrossall projects) for a given or limited resourceexpenditure.

ECV: The Expected Commercial Value

method uses decision-tree analysis, breakingthe project into decision stages forexample, Development and Commercializa-

tion (Figure 1). Define the various possibleoutcomes of the project along with probabili-ties of each occurring (for example probabili-ties of technical and commercial success).The resulting ECV is then divided by the con-straining resource (as in the NPV method),and projects are rank-ordered according to

this index in order to maximize the bang forbuck. The method also approximates realoptions theory, and thus is appropriate forhandling higher risk projects4.

Scoring model:Decision-makers rate projects

on a number of questions that distinguishsuperior projects, typically on 1-5 or 0-10scales. Add up these ratings to yield aquantified Project Attractiveness Score,which must clear a minimum hurdle. ThisScore is a proxy for the value of the projectbut incorporates strategic, leverage andother considerations beyond just financialmeasures. Projects are then rank-orderedaccording to this score until resources runout. A typical scoring scheme is shown inFigure 2.

Goal #2. Seek Balance in Your Portfolio:Here the goal is to achieve a desired balance of

projects in terms of a number of parameters; forexample, long term projects versus short ones;or high risk versus lower risk projects; and acrossvarious markets, technologies, product catego-ries, and project types (e.g., new products, im-provements, cost reductions, maintenance andfixes, and fundamental research).

Pictures portray balance much better than do

numbers and lists, and so the techniques usedhere are largely graphical in nature. These in-clude:

Bubble diagrams:Display your projects on a

two-dimensional grid as bubbles as in Figure3. The axes vary but the most popular chartis the risk-reward bubble diagram, whereNPV is plotted versus probability of technicalsuccess. Then seek an appropriate balance innumbers of projects (and spending) acrossthe four quadrants.

Pie charts: Here show your spending

breakdowns as slices of pies in a pie chart.Popular pie charts include a breakdown byproject types, by market or segment, and byproduct line or product category.

Both bubble diagrams and pie charts, unlike themaximization tools outlined above, are notdecision-models, but rather information display:

they depict the current portfolio and where theresources are going the what is. These chartsprovide a useful beginning for the discussion of what should be how should your resourcesbe allocated.

Goal #3. Your Portfolio Must Be Strategi-cally Aligned: This means that all your projectsare on strategy; and that your breakdown ofspending across projects, areas, markets, etc.,must mirror your strategic priorities (your areasof focus and their respective priorities). Severalportfolio methods are designed to achievestrategic alignment:

Top-down, strategic buckets: Begin at the

top with your businesss strategy and fromthat, theproduct innovation strategyfor yourbusiness its goals, and where and how to

focus your new product efforts. Next, makesplits in resources: given your strategy,where should you spend your money?.These splits can be by project types, productlines, markets or industry sectors, and so on.Thus, you establish strategic bucketsor en-velopes of resources.

Portfolio Management for New Products: Picking the Winners



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Then, within each bucket or envelope, list all theprojects active, on-hold and new and

rank these until you run out of resources inthat bucket. The result is multiple portfolios,one portfolio per bucket. Another result isthat your spending at year-end will truly re-flect the strategic priorities of your business.

Top-down, product roadmap: Once again,

begin at the top, namely with your businessand product innovation strategy But here thequestion is: given that you have selectedseveral areas of strategic focus markets,technologies or product types what majorinitiatives must you undertake in order to besuccessful here?. Its analogous to the

military general asking: given that I wish tosucceed in this strategic arena, what majorinitiatives and assaults must I undertake inorder to win here? The end result is a map-ping of these major initiatives along a time-line the product roadmap (Figure 4). The

selected projects are 100% strategicallydriven.

Bottom-up:Make good decisions on individ-

ual projects, and the portfolio will take careof itself is a commonly accepted philosophy.That is, make sure that your project gating

system is working well that gates are ac-cepting good projects, and killing the poorones and the resulting portfolio will be asolid one. Even better, to ensure strategicalignment, use a scoring model at your pro-

ject reviews and gates (Figure 2), and in-clude a number of strategic questions in thismodel. Strategic alignment is all but assured:your portfolio will indeed consist of all onstrategy projects (although spending splitsmay not coincide with strategic priorities).

Note that regardless of the strategic approachhere, all of these methods presuppose that your

business does indeed have a product innovationstrategy, something that many businesses lackaccording to our benchmarking study 5.

Goal #4. Pick the Right Number of Projects:Most companies have too many projects under-

way for the limited resources available6. The

result ispipeline gridlock: projects end up in aqueue; they take too long to reach the market;and key activities for example, doing the up-front homework are omitted because of a lack

people and time. Thus an over-riding goal is toensure a balance between resources required for

the active projects and resources available. Hereare the ways:

Resource limits: The value maximizationmethods (Goal #1) build in a resource limita-tion rank your projects until out of re-sources. The same is true of bubble dia-grams (Goal #2): the sum of the areas of thebubbles the resources devoted to each pro-ject should be a constant, and adding onemore project to the diagram requires thatanother be deleted.

Resource capacity analysis: Determine your

resource demand: prioritize your projects

(best to worst) and add up the resourcesrequired by department for all active projects(usually expressed in person-days permonth)7. Project management software, suchas MS-Project, enables this roll-up of re-source requirements. Then determine theavailable resources (the supply) per depart-ment how much time people have to workon these projects. A department-by-department and month-by-month assess-ment usually reveals that there are too manyprojects; it suggests a project limit (the point

beyond which projects in the prioritized listshould be put On Hold); and it identifieswhich departments are the bottlenecks.

Your New Product Process Must Work

Before you charge ahead with portfolio manage-ment, put first things first: make sure that yournew product process or gating systemis workingwell. A majority of product developers have im-plemented Stage-Gatesystems, according to aPDMA study8, but experience suggests that manyare due for an overhaul. An effective new prod-uct process is central to portfolio management

for two reasons:1. First, regardless of the sophistication of theportfolio models used, your input data must besound. And look to your new product process todeliver data integrity. Usually this is not the case.For example, our best practices survey revealedthat, in spite of their theoretical rigor, financialmodels (NPV and ECV) yield the worst portfoliosof projects, not because the models are wrong,but because the input data were so much in




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error.

2. Second, your gating process should at mini-mum kill or cull out the bad projects, and in sodoing, yield a better portfolio. Again often thisdoes not happen: management confessed to aninability to kill projects, the lack of effective gatecriteria, and many projects simply getting a lifeof their own.

Data integrity means that the up-front homeworkin projects must be done. Many companies haveimproved the quality of execution and at thesame time provided far better data for projectselection by implementing a systematic Stage-

Gatenew product process. Build into your proc-ess two stages of homework prior to the begin-ning of Development (Figure 5):

the Scoping Stage, which entails a pre-

liminary market, technical and businessassessment

Building the Business Case, which in-

volves much more detailed market re-search (a user needs-and-wants study,competitive analysis, concept tests)along with technical and manufacturingassessments.

Incorporating in these two key stages as part ofyour new product process not only results in bet-ter and sharper product definition, a critical suc-cess driver, but also much better data as inputsto the various portfolio models above.

An effective new product process also meanseffective gates. In best-practice businesses, thistranslates into a menu of specified deliverablesfor each gate, visible Go/Kill and prioritizationcriteria at the gates (many companies use score-cards to rate projects at gate meetings), definedgatekeepers per gate, clear gate outputs, and

even rules of engagement for the gatekeepingor leadership team of the business. If your gatesare weak if they fail to weed out mediocre projects then check yourself against gating best-practices above. Perhaps its time to rethink yournew product process!

ConclusionPortfolio management is fundamental to new

product success. But its not as easy as it firstseems. Not only must you seek to maximize thevalue of your portfolio, but the development pro-jects in your portfolio must be appropriately bal-anced, there must be the right numbers of projects, and finally, the portfolio must be strategi-cally aligned. No one portfolio model can deliveron all four goals, and so best-practice businessestend to use multiple methods to select their pro-jects. Finally, our studies reveal that any portfoliomethod outlined above is better than none at all,so our advice is: just do it!

- End-




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Figure 1. Determination of Expected Commercial Value of Project




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Figure 2. A typical Scoring Model For Project Prioritization

Strategic Alignment: Degree to which project aligns with our strategy

Strategic importance

Product/Competitive Advantage: Offers customers/users unique benefits

Meets customer needs better

Provides value for money for the customer/user

Market Attractiveness:

Market size

Market growth rate Competitive intensity in the market (high=low score)

Synergies (Leverages Our Core Competencies):

Marketing synergies

Technological synergies

Operations/manufacturing synergies

Technical Feasibility:

Size of technical gap (large=low score)

Technical complexity (barriers to overcome)(many/high = low score)

Degree of technical uncertainty (high=low score)

Risk Vs. Return: Expected profitability (magnitude: NPV)

Return on investment (IRR)

Payback period (years; many=low score)

Certainty of return/profit estimates

Low cost & fast to do

The six Factors are scored (0-10) for each project at gate review meetings by the gatekeepers.Bulleted items are discussed to arrive at Factor Scores. Each Factor must clear a minimumhurdle. They are then added (weighted or unweighted) to yield the Project Attractiveness Score,which is used to make Go/Kill decisions at gates and to prioritize projects.




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Figure 3. A Typical Risk-Reward Bubble Diagram

Projects are shown as bubbles. This high growth business has too many White Elephants and

too much spending in the Bread & Butter quadrant, not enough in the Pearls quantrant, and isunderfunding the Oysters. Example based on a growing Business Unit within a large chemicalcompany.




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Figure 4. The Product Roadmap

The Product Roadmaps shows the major development initiatives (platforms and products) on atimeline for several years into the future. This example is from a manufacturer of process equipment(mixers & agitators)



Platform Extension

Extensions into Petroleum Blenders

Petroleum Blenders : Low Power Range

Petroleum Blenders : High Power

Aerator Platform

New Product Platform: Aerators

P&P Aerators: Line #1 (fixed mount)

P&P Aerators: Line #2 (floating)

P&P Aerators: Hi-Power

Chemical Mixers: Hi-Power

Original Agitator Platform - Extension

Extensions into Chemical Mixers

Chemical Mixers: Basic Line

Chemical Mixers: Special ImpellersPlanextensions

& newplatforms

Platform Extension

Extensions into Aerators for Chemical Waste

Chemical Aerators: Line #1

Chemical Aerators: Line #2

Product Roadmap

Time


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Figure 5. An overview of a Typical Stage-Gate Process

There are five stages plus the idea or Discovery stage. Each stage is preceded by a gate, wherea team of gatekeepers (senior management) make GoKill decisions on projects. The stages arewhere prescribed activities are undertaken by cross-functional project teams. Almost 70% of U.S.product developers have implemented such Stage-Gate processes, according to a PDMA study.



Gate2

Gate3

Gate4

Gate5

Gate1

Stage 1 Stage 3 Stage 4 Stage 5

Scoping

Stage 2

BuildBusiness

Case

Development Testing &Validation

Launch

Post-LaunchReview

Stage 1

Discovery

Idea Screen

SecondScreen

Go toDevelopment

Go toTesting

Go toLaunch

Stage-GateTM: A five-stage, five-gate model

along with Discovery and Post-Launch Review

Driving New Products to Market

Source: Winning at New Products [4]


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5 New product benchmarking studies: Cooper, R.G., "New product leadership: building in the success factors," NewProduct Development & Innovation Management, 1,2, 1999, 125-140; Cooper, R.G., Product Innovation and Tech-nology Strategy in the Succeeding in Technological Innovation series, Research-Technology Management, 43,1,Jan-Feb. 2000, 28-44; and: Cooper, R.G. & Kleinschmidt, E.J., Winning businesses in product development: criticalsuccess factors, Research-Technology Management, 39, 4, July-Aug 1996, 18-29.

6 See articles in reference note 2; also: Cooper, R.G., Edgett, S.J. & Kleinschmidt, E.J., New problems, newsolutions: making portfolio management more effective, Research-Technology Management, 2000, 43, 2, 18-33.

7 For more on resource capacity analysis, see: Cooper, R.G., The invisible success factors in product innovation,Journal of Product Innovation Management, 16, 2, April 1999, 115-133.

8 Stage-Gate processes are widely used by the top performing companies. See: A. Griffin, Drivers of NPD Success:The 1997 PDMA Report( Product Development & Management Association) 1997. For more information on Stage-Gate processes, see Winning at New Products, reference note 1; and www.prod-dev.com

Additional Reading:

1 This essay is based on a number of books and articles by the authors: R.G. Cooper, S. J. Edgett & E.J.Kleinschmidt, Portfolio Management for New Products. 2nd Edition, Cambridge, Mass: Perseus Books, 2001; Cooper,R.G., Winning at New Products: Accelerating the Process from Idea to Launch, 3rd edition. Cambridge, Mass:Perseus Books, 2001; Cooper, R.G., Edgett, S.J. & Kleinschmidt, E.J., Portfolio management in new productdevelopment: lessons from the leaders Part I, Research-Technology Management, Sept-Oct 1997, 16-28; Part II,Nov-Dec 1997, 43-57. Also see: www.prod-dev.com.

2 Portfolio management best practice studies: R.G. Cooper, Edgett, S.J. & Kleinschmidt E.J, Best practices for man-aging R&D portfolios, Research-Technology Management, 41, 4, July-Aug. 1998, 20-33; and: Cooper, R.G., Edgett,S.J. & Kleinschmidt, E.J., New product portfolio management: practices and performance, Journal of Product In-novation Management, 16,4, July 1999, pp 333-351.

3 For more information on all portfolio methods, see: Portfolio Management for New Products, reference note 1above.

4 For a discussion of real options theory, see: T. Faulkner, "Applying 'Options Thinking' to R&D Valuation." Re-search-Technology Management, May-June 1996, pp. 50-57.




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Worlds Top Innovation Management Scholars

-Journal of Product Innovation Management, May 2007

Dr. Scott J. Edgett is internationally recognized as one of the worlds top ex-perts in product innovation and is the pioneer of portfolio management for prod-uct innovation. He is a high profile speaker and sought-after consultant. Dr.Edgett has had extensive experience working with large multinational clients in avariety of industries, principally focusing on issues affecting innovation leader-ship and capability. He is credited with helping business executives and innova-tion professionals successfully implement world-class innovation processes thathave generated outstanding results. His speaking engagements and consultingwork have taken him around the globe to work with some of the worlds bestinnovators and companies among the Fortune 1000.

Dr. Edgett is Chief Executive Officer and co-founder, with Dr. Robert G. Cooper,

of both Product Development Institute and Stage-Gate Inc. He has spent more

than 20 years researching and developing innovation best practices and workingwith organizations in product innovation. He is a prolific author having co-authored six books including the popular Portfolio Management for New Prod-ucts, 2nd Edition and has published more than 60 academic articles. Dr. Edgettis a former Professor of the Michael G. DeGroote School of Business, McMasterUniversity in Ontario and is a Faculty Scholar at the Institute for the Study ofBusiness Markets (ISBM) at Penn State University.

Dr. Robert G. Cooper

Dr. Scott J. Edgett

Dr. Robert G. Cooper is one of the most influential innovation thought leaders inthe business world today. He pioneered the original research that led to manyground-breaking discoveries including the Stage-Gate Idea-to-Launch process.Now implemented by almost 80% of North American companies, it is consideredto be one of the most important discoveries in the field of innovationmanagement. He has spent more than 30 years studying the practices and pitfallsof 3,000+ new product projects in thousands of companies and has assembled theworlds most comprehensive research on the topic. His presentations and practicalconsulting advice have been widely applauded by corporate and business eventaudiences throughout the world making him one of the most sought-afterspeakers.

A prolific author, he has published more than 90 academic articles and sevenbooks, including the best selling Winning at New Products, 3rd Edition. He is the

recipient of numerous prestigious awards including the Crawford Fellow from theProduct Development and Management Association (PDMA) and the Maurice Hol-land Award from the Industrial Research Institute (IRI). Dr. Cooper is a Professorof Marketing and Technology Management at the Michael G. DeGroote School ofBusiness at McMaster University in Ontario, Canada and Distinguished Fellow atthe Institute for the Study of Business Markets (ISBM) at Penn State University inPennsylvania, USA.



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Want to Learn More?

Executive Seminars Dr. Robert G. Cooper and Dr. Scott J. Edgett invite youto attend their Innovation Best Practice Seminars

Developing A Product Innovation Strategy and Deciding Your New Product Portfolio -Making Strategic Choices and Picking the Winners

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Successfully Designing and Implementing the Stage-Gate Process - A Best Practice Approach

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